Oil and Gas Rights

Subsurface oil and gas are treated in a slightly different manner as compared to hard minerals. Much of this is because oil and gas are not permanently fixed like minerals. When oil and gas are pumped from a parcel of land, the person who removed the oil or gas—and is authorized to do so—owns the removed oil or gas as personal property.

Once pumped oil or gas becomes personal property, it normally stays that way even if it is put back into the ground. No one else can then pump out that oil or gas a second time and claim it his or her personal property. That re-pumped oil or gas is considered the personal property of the person who first pumped it out.

But while oil or gas remains in the ground, their ownership is, in fact, governed by two legal theories or approaches, depending on the state in which property is located:

  • Law of Capture. States such as California, Oklahoma and Louisiana follow the "law of capture," which rule that the property owner actually does not own the oil and gas until they are pumped out of the ground or captured. This approach is based on the belief that oil and gas are fluid and may move from one parcel of property to another.
  • Law of Ownership. Many states, such as Mississippi, Ohio, Texas and West Virginia, are more pro-landowner. These states believe that oil and gas are naturally trapped, so oil and gas are owned by the property owner, just as hard minerals are owned.

Who is right? In a way, both are correct, based on how you look at it.

Oil and gas normally come together; but they are not part of some underground river or lake of crude. In fact, oil is actually found compacted and trapped within the millions of miniscule pores inside porous rock. Natural gas is trapped within or with the oil itself. So in its natural state, oil and gas really are fixed.

Oil and gas are tightly packed in their natural situation and are under a great deal of pressure. When a well is dug into these deposits, the pressure sends the oil and gas toward the low-pressure area of the well opening. Drilling actually forces oil and gas to shift from one area to another in search of the lower-pressure area. The law of capture recognizes this shifting as the basis of its approach.

Regardless of the state, if a person drills a well and pumps oil or gas out from his land, that oil or gas belongs to him. Even if his drill begins to suck oil or gas from his neighbor's deposit, that extracted oil or gas belongs to the person who has captured it. In order to protect her interest, the neighbor can drill an offset well on her property to capture her own oil or gas, as well as alleviate the pressure that pushes the oil or gas into her neighbor's land.

This law of capture is not absolute, however. Often, water or gas is injected into the ground to force more oil or natural gas out. This can sometimes drain oil or gas away from neighboring properties. Some states provide for damages to be awarded to the property owner who loses oil or natural gas because of such drainage.

Oil or Gas Leases

Oil and gas drilling has become an increasingly complex and advanced operation. Because most property owners who possibly have significant subsurface oil or gas deposits do not have the knowledge or resources to competitively drill their own wells, they normally enter into an oil lease with an oil company. Through the oil lease, the property owner is guaranteed a steady source of income from the oil or gas in the owner's land:

  • Cash bonus. The property owner normally receives a cash bonus at the time of initial signing of the oil lease.
  • Royalty. The property owner (lessor) receives a royalty on the oil or gas removed through wells on his or her property. A typical arrangement in the past would give the lessor one-eighth (1/8) of the oil or gas removed through the well on the lessor's property.
  • Delay rental. If the lessee fails to begin drilling or delays its start, a delay rental is sometimes paid to the owner. In fact, most oil leases will terminate automatically if the lessee fails to begin drilling.

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